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A decision under uncertainty is when there are many unknowns and no possibility of knowing what
could occur in the future to alter the outcome of a decision. Different Decision Making Criteria are:
Maximim criteria, Maximax criterion, Regret criterion, Hurwiez criterion, Laplace criterion.
Maximin Criterion: This criterion, also known as the criterion of pessimism, is used when the
decision-maker is pessimistic about future. Maximin implies the maximisation of minimum
payoff.
Maximax Criterion: This criterion, also known as the criterion of optimism, is used when the
decision-maker is optimistic about future. Maximax implies the maximisation of maximum
payoff.
Regret Criterion: This criterion focuses upon the regret that the decision-maker might have
from selecting a particular course of action.
Hurwicz Criterion: The maximax and the maximin criteria, discussed above, assumes that the
decision-maker is either optimistic or pessimistic.
Laplace Criterion: In the absence of any knowledge about the probabilities of occurrence of
various states of nature, one possible way out is to assume that all of them are equally likely to
occur.
ITQ 1: Discuss decision making under uncertainty?
ITA 1: The problem of decision making under uncertainty is to choose an action for decision among many
different available actions which gives possibly maximum expected profit or maximum expected revenue
or minimum expected losses or minimum expected costs as the case may be, under uncertain situations.
Decision m\Making under Risk
Risk implies a degree of uncertainty and an inability to fully control the outcomes or consequences of
such an action. Risk or the elimination of risk is an effort that managers employ.
The process is as follows:
1. The problem is defined, and all feasible alternatives are considered. The possible outcomes for each
alternative are evaluated.
2. Outcomes are discussed based on their monetary payoffs or net gain in reference to assets or time.
3. Various uncertainties are quantified in terms of probabilities.
4. The quality of the optimal strategy depends upon the quality of the judgments. The decision-maker
should identify and examine the sensitivity of the optimal strategy with respect to the crucial factors.
In decision-making under risk the process is as follow. The problem is defined and all feasible
alternatives are considered. Outcomes are discussed based on their monetary payoffs or net gain in
reference to assets or time. Various uncertainties are quantified in terms of probabilities
The quality of the optimal strategy depends upon the quality of the judgments
The decision making under risk process is as follows:
Use the information you have to assign your beliefs
Each action has a payoff associated with each of the states of nature
We compute the expected payoff
We accept the principle that we should minimize (or maximize) the expected payoff,
Execute the action which minimize
ITQ 2: Differentiate between decision making under uncertainty and risk?
ITA 2: In case of decision-making under uncertainty the probabilities of occurrence of various states of
nature are not known. When these probabilities are known or can be estimated, the choice of an optimal
action, based on these probabilities, is termed as decision making under risk.
A set is a collection of objects, or element. Typically, the type of all the elements in a set is the same.
(For example, all the elements in a set could be integers.) Sets can be infinite of course. For example V =
{a, e, i, o, u} is the set of vowels in English. B = {0, 1} the set of symbols in the binary number system. O =
{2, 4, 6,} = {x: where x is an even positive integer}.
ITQ 1: List the two common methods of denoting the elements in a set
ITA: 1: Explicitly list the elements inside of a set of curly braces ({}), as follows: {1, 2, 3, 4}.
2) Give a description of the elements in a set inside of a set of curly braces as follows: {2x | x N}.
Set Operators
The first two operators are binary operators, union and intersection. In each of these examples, let A
and B be sets. The union of two sets contains all elements in either set and the
intersection of two sets contains all elements in BOTH sets.
Equality of Sets
There are three essentially different ways that we can show two sets to be equal. The first two are going
to be analogous to methods used in logic.
1) Use the laws of set theory.
2) Use the table method.
Table Method
Another way to think of showing set equality is to look at a Venn Diagram and consider each possible
position an arbitrary element can be located.
ITQ 3: What is the difference between union and intersection of two set
ITA 3: The union of two sets contains all elements in either set and the intersection of two sets contains
all elements in BOTH sets.
Classical probability applies to situations where you know all the possible outcomes, such as
when throwing dice or flipping a coin.
Empirical probability applies when we have to estimate a frequency based on actual
observations.
Subjective probability applies in situations that cannot really be repeated
P (A) = 1 means the event occurs with certainty; P(A) = 0 means that it will certainly not occur.
P (A) is always in the interval [0,
The complement of event A is denoted ~A (or in the book A’). This is the probability that A will
not occur. P(~A) = 1 – P(A), and P(A) + P(~A) = 1.
Intersections and Unions of Events
The intersection of two events is when two events both happen. The union of two events is
when one or the other happens, or both
Probability of the union can be found using this formula: P (A U B) = P(A) + P(B) – P(A ∩ B)
If the two events are mutually exclusive, meaning they cannot happen at the same time, then
the formula simplifies to P (A U B) = P(A) + P(B).
ITQ 1: The sum of the chances of occurrences of events in a sample space is…….
ITA 1: The probability of all events put together must add up to 1, so long as we don’t double-count by
including events that overlap.
Conditional Probabilities A conditional probability tells you the probability of some event given
that you already know another event has occurred.
Multiplication Rule
Events are called independent if the occurrence of one does not affect the probability of the other. That
is, P (A|B) = P (A).
Bayes Rule
Bayes’ Rule is a formula for finding a conditional probability P(A|B) given information about
P(B|A).
Medical Testing: Probably the most important applications of Bayes’ Rule involve medical
testing, such as for disease or drug use.
The Monty Hall Problem: Monty Hall, the host presents you with three doors. Behind one
there’s a bag of gold; behind the other two there are goats.
ITQ 2: State the formula for conditional probability
ITA 2: The formula for conditional probability is: P(A|B) = P(A B) / P(B)
A probability distribution is a specification of all different possible values of a random variable along
with a measure of the frequency for each of those values. There are two kinds of random variables and
thus two kinds of probability distributions: discrete and continuous. A discrete variable that can only
take a countable number of different values: Countable is not the same as finite.
For discrete probability distributions, the value of the function P(x) can be interpreted as the probability
of the value x. But for continuous probability distributions, we cannot assign a probability to each
possible value because there are an infinite number of possible values. the normal distribution. The
normal distribution has a pdf that looks like this:
The standard normal distribution is the normal distribution with mean of zero and standard deviation of
1. If you plugged those into the pdf above, you’d get:
We changed x to z because, for historical reasons, we happen to call the standard normal variable z
instead of x.)
If you have a variable x that is normally distributed with mean μ and standard deviation σ, you can
convert any value of that variable into an equivalent value of a standard normal variable using the
following:
Normative decision theory, which gives advice on how to make the best decisions, given a set of
uncertain beliefs and a set of values.
Descriptive decision theory, which analyzes how existing, possibly irrational agents actually
make decisions.
Prescriptive decision theory, which tries to guide or give procedures on how or what we should
do in order to make best decisions in line with the normative theory.
2 Decision theory is concerned with the choices of individual agents whereas game theory is
concerned with interactions of agents whose decisions affect each other.
3 Political and other social scientists, philosophers.
4 Computer scientists.
ITQ 1: Decision theory can be broken into three branches, briefly explain them.
ITA 1: Decision theory can be broken into three branches: normative decision theory, which gives advice
on how to make the best decisions, given a set of uncertain beliefs and a set of values; and descriptive
decision theory, which analyzes how existing, possibly irrational agents actually make decisions; and
prescriptive decision theory, which tries to guide or give procedures on how or what we should do in
order to make best decisions in line with the normative theory.
Alternatives
A highly controversial issue is whether one can replace the use of probability in decision theory by other
alternatives.
Probability theory
Advocates for the use of probability theory point to:
the work of Richard Threlkeld Cox for justification of the probability axioms,
the Dutch book paradoxes of Bruno de Finetti as illustrative of the theoretical difficulties that
can arise from departures from the probability axioms, and
the complete class theorems, which show that all admissible decision rules are equivalent to
the Bayesian decision rule for some utility function
The proponents of fuzzy logic, possibility theory, quantum cognition, Dempster– Shafer theory, and info-
gap decision theory maintain that probability is only one of many alternatives and point to many
examples where non-standard alternatives have been implemented with apparent success
Ludic fallacy A general criticism of decision theory based on a fixed universe of possibilities is that it
considers the "known unknowns", not the "unknown unknowns
Waiting time has become more important because of the increased emphasis on quality, especially in
service-related operations. Companies focus on reducing waiting time as a component of quality
improvement. Companies are able to reduce waiting time and provide faster service by increasing their
service capacity, which usually means adding more servers--that is, more tellers, more mechanics, or
more checkout clerks.
Operating Characteristics
Operating characteristics that describe the performance of the queuing system and that management
uses to evaluate the system and make decisions
ITQ 2: What do you know about arrival rate in queuing line analysis?
ITA 2: The arrival rate is the rate at which customers arrive at the service facility during a specified
period of time. This rate can be estimated from empirical data derived from studying the system or a
similar system, or it can be an average of these empirical data.
There is a type of linear programming problem that may be solved using a simplified version of the
simplex technique called transportation method.
The Transportation Problem There is a type of linear programming problem that may be solved using a
simplified version of the simplex technique called transportation method
the two common objectives of such problems are either (1) minimize the cost of shipping m units to n
destinations or (2) maximize the profit of shipping m units to n destinations.
The Transportation Matrix: In such situations, for the transportation method to work, a dummy
warehouse or factory must be added. Procedurally, this involves inserting an extra row (for an
additional factory) or an extra column (for an ad warehouse). The amount of supply or demand
required by the ”dummy” equals the difference between the row and column totals.
Initial Feasible Solution: Initial allocation entails assigning numbers to cells to satisfy supply and
demand constraints. Next we will discuss several methods for doing this: the Northwest- Corner
method, Least-Cost method, and Vogel's approximation method (VAM).
Develop Optimal Solution: To develop an optimal solution in a transportation problem involves
evaluating each unused cell to determine whether a shift into it is advantageous from a total-cost
stand point. If it is, the shift is made, and the process is repeated. When all cells have been
evaluated and appropriate shifts made, the problem is solved. One approach to making this
evaluation is the Stepping stone method.
Alternate Optimal Solutions: When the evaluation of any empty cell yields the same cost as the
existing allocation, an alternate optimal solution exists.
Degeneracy exists in a transportation problem when the number of filled cells is less than the
number of rows plus the number of columns minus one (m + n - 1).
To solve a linear programming model using the Simplex method the following steps are necessary:
1. Standard form: Standard form is the baseline format for all linear programs before solving for
the optimal solution and has three requirements: (1) must be a maximization problem, (2) all
linear constraints must be in a less-than-or-equal-to inequality,
(3) all variables are non-negative.
2. Determine Slack Variables: Slack variables are additional variables that are introduced into the
linear constraints of a linear program to transform them from inequality constraints to equality
constraints.
3. Setting up the Tableau: The tableau consists of the coefficient corresponding to the linear
constraint variables and the coefficients of the objective function. In the tableau below, the
bolded top row of the tableau states what each column represents.
4. Check Optimality: The optimal solutions of a maximization linear programming model are the
values assigned to the variables in the objective function to give the largest zeta value. The
optimal solution would exist on the corner points of the graph of the entire model.
5. Identify Pivot Variable: The pivot variable is used in row operations to identify which variable
will become the unit value and is a key factor in the conversion of the unit value. The pivot
variable can be identified by looking at the bottom row of the tableau and the indicator.
6. Create the New Tableau: The new tableau will be used to identify a new possible optimal
solution.
7. Check Optimality: the optimal solution of maximization linear programming model are the
values assigned to the variables in the objective function to give the largest zeta value.
8. Identify New Pivot Variable: If the solution has been identified as not optimal, a new pivot
variable will need to be determined.
9. Create New Tableau: After the new pivot variable has been identified, a new tableau will need
to be created.
10. Check Optimality: Using the new tableau, check for optimality.
11. Identify Optimal Values: Once the tableau is proven optimal the optimal values can be
identified. Thesecan be found by distinguishing the basic and non-basic variables.
Step 3. Calculate the Standard Error of the Mean. The Standard Error of the Mean is the likelihood range
of values of the Mean of the population
. Hypothesis and Hypothesis Tests
1). Null hypothesis: Is a statistical hypothesis testing that assumes that the observation is due to a
chance factor.
2). Alternative hypothesis: Contrary to the null hypothesis, alternative hypothesis shows that
observations are the result of a real effect
Estimating the probability of encountering a type II error (denoted beta) is more involved than
estimating the probability of a type I error.
F-Test: The F-test is designed to test if two population variances are equal. It does this by comparing the
ratio of two variances
T-test other words, it is a class of distributions. The degrees of freedom for this t statistics comes from
the sample standard deviation s in the denominator of equation below
The larger the degrees of freedom, the closer the t-density is to the normal density. Large value of t
indicates a real difference in the two distributions. The critical value depends on:
4. Hypothesis testing: In hypothesis testing for the one sample t-test, statistical decisions are
made to decide whether or not the population mean and the same mean are different.
One-tailed test: In hypothesis testing, when the given statistical hypothesis is one value like H0:
μ1 = μ2, it is called the one-tailed test
Two-tailed test: In hypothesis testing, when the given statistics hypothesis assumes a less than
or greater than value, it is called the two-tailed test
Forecasting Forecasting (or prediction): refers to the process of generating future values of a
particular event. Forecasting can be done within the firm or on the economy.
Time series methods: Time series methods or models makes reference to models use in
forecasting where no "explanatory" variables are involved.
Moving averages: A moving average is a method to obtain a smoother picture of the behavior of
a series.
Two General Aspects of Time Series Patterns are Trends and Seasonality,
The trend represents a general systematic linear or (most often) nonlinear component that
changes over time and does not repeat or at least does not repeat within the time range
captured by our data while Seasonality repeats itself in systematic intervals over time.
the first step in the process of trend identification is smoothing. Smoothing always involves
some form of local averaging of data such that the nonsystematic components of individual
observations cancel each other out. The main disadvantage of median smoothing is that in the
absence of clear outliers it may produce more "jagged" curves than moving average and it does
not allow for weighting. There are two main goals of time series analysis: (a) Identifying the
nature of the phenomenon represented by the sequence of observations (b) Forecasting
(predicting future values of the time series variable.